COMMENTARY The other side of SAIL’s profits



State-owned steel giant’s profits are found increasingly because of raw material subsidies and not due to real economic value addition. This only leads to wastage and poor operational management, causing higher pollution


he public sector steel giant Steel Authority of India Limited (SAIL) frequently boasts of its gargantuan profits and the Maharatna tag to brush away all criticism on its poor environmental performance levels. By claiming its ‘immense contribution’ to the nation, SAIL feels they should be considered above board on pollution issues. But a deeper analysis on value added from its latest financial statements shows a degree of misrepresentation to its shareholders and the nation. The analysis done by Centre for Science and Environment (CSE), a Delhi research institution, finds that the profit earned by SAIL is increasingly because of the free iron ore gift provided by the government, or in other words, by the citizens of the country. As per a detailed CSE study, post independence in 1950s, the Indian steel sector was brought under the licensing system and large integrated steel plants (above 1 million tonne capacity) were reserved only for the public sector under SAIL. To get the different factories kick started, swathes of iron ore mines were given away free (see Table 1) along with making provisions for their rail linkages and other freebies such as water, land, etc. Table 1: Iron ore freebies
SAIL Plant Bhilai Steel Plant Durgapur Steel Plant Rourkela Steel plant Mines allotted Dalli, Rajhara Bolani (Orissa) Barsua (Orissa) Kalta (Orissa) Kiriburu (Jharkhand) Meghahatuburu (Jharkhand) Bokaro Kiriburu(Jharkhand) Meghahatuburu (Jharkhand)
Source: Raw Materials Division, Steel Authority of India Limited1

Year of Commissioning 1960 1960 1960 1966 1964 1985 1964 1985

(both Chhattisgarh)

*Green Rating Project, Centre for Science and Environment, New Delhi 1 Source: (as viewed on November 5, 2012)


if international price of a particular grade of steel was 700 USD/ tonne. 2012) Source: Budget. No license was henceforth required for setting steel units.000 8. Graph 1: SAIL operating profit from 1990s tracks international iron ore price 200 180 Iron ore price. http://planningcommission.000 SAIL operating steel sector was also freed2. However. at this very juncture. though SAIL continued to get benefit from free iron 12.moneycontrol.SAIL Annual Reports for the corresponding years 2 3 4 5 6 Source: Joint Plant 2012) Source: Report of the Working Group on Steel Industry for the Eleventh Five-Year Plan (2007-2012) Annexure 4.000 0 10.nic. Ministry of Steel http://www. as government feared cheaper steel imports could harm the Indian producers. The pricing of product at close to import parity prices6 boosted its profits sharply (see graph 1). Operating profits . 2012) 2 . As China began ramping up its infrastructure and shifted to urbanisation. i. All this while.China Import price IndexMundi. government sharply reduced duty of steel to 5% to bring it in line with the global pricing5. These factors led to rise in international steel Import parity pricing Interestingly though.000 2.GREEN RATING PROJECT Steel price and market distribution was also stipulated by the government and hence profits of the companies remained under control. For example. when the government liberalised the Indian economy. it began to sell steel at domestic market (as viewed on November 5. 2004-05 http://indiabudget.html (as viewed on November 5. which in turn closely tracked the international prices plus the import duties.pdf (as viewed on November 5.asp (as viewed on November 5.jpcindiansteel.000 Ministry of Finance. 36750/tonne. it still kept import duty high at above 90%3. leading to its price rise (see graph 1). Simultaneously. it gobbled all iron ore among other raw materials.pdf (as viewed on November 5. SAIL would sell the same grade to its Indian customers at 735 USD/tonne (considering 5% import duty) or around Rs. The import duties were then gradually brought down to 25% by 20034. there was spurt in demand for cars and houses in the western countries fuelled by cheap credit. In 1991.nic. nic. the world steel market had changed. 2012) Source: http://www.jpcindiansteel. Annexure Iron ore price movement and SAIL operating profit trend 14.nic. USD/tonne 160 140 120 100 80 60 40 20 0 Aug-82 Aug-84 Aug-86 Aug-88 Aug-90 Aug-92 Aug-94 Aug-96 Aug-98 Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10 Aug-12 International iron ore price SAIL operating profit 6. 2012) Source: Report of the Working Group on Steel Industry for the Eleventh Five-Year Plan (2007-2012). From August 2004 onwards.asp and http://www.nic. Rs crore Source: Iron ore . owing to heightened inflation worries. from 2002 onwards. http://planningcommission.

/ tonne 2006-07 1488. the noticeable difference of this benefit is only visible in the recent years.7 2855.orissaminerals.3% Rs.1 2010-11 2337. Delhi *Source: NMDC ore price as per letter dated 25 Jan 2012 by Chief Minister.8 5459.8 3859.79 23. And this needs to be compared with SAIL’s annual dividend (payout) to government of only Rs./ tonne Rs. 700 crore in 2011-12.8 4191.0 3693.9 2007-08 2910.6 Rs. So. Crores Percentage 10966 19% 12955 22% 10946 38% 11871 30% 9030 73% 7658 71. 3 . http://www.28 769.31 24. Crores Million tonnes Rs.96 22. 5459 crores in 2011-12.5 2583. it would have earned revenue of say Rs.8 Rs. the iron ore gift never translated into windfall gains as government controlled the market price of steel.COMMENTARY Extent of profits CSE found the extent of benefit gained from differential price of iron ore (i. Orissa to Union Minister of Mines. In the earlier decades till 1980s.07 1013.2 2845. which is equivalent to almost 70 percent of SAIL’s operating profit for that year.4 Rs.7 Download/DO-CM-reg-mineral-resource-rent-tax.1 1822. 2012) In other words.1 2024.8 3558.00 1212.1 2570.3 4287. In essence. Crores Percentage 6202 34% 7537 39% 6170 68% 6754 53% 4905 134% 3543 154% Source: Analysis from SAIL Annual Reports and financial statements.2 2324. had the government just sold iron ore in the open market (like it does through other state owned firm NMDC Limited).9 6564.0 1800. Table 2: Cheap iron ore now bringing in the moolah Parameter Value of Iron ore consumed Volume consumed Iron ore mined cost for SAIL Average market price of iron ore for the year (for NMDC ore)* Average market price of iron ore assuming 10% lower value of SAIL ore due to slightly poor quality compared to NMDC Difference between market price and SAIL cost for iron ore Differential value in iron ore costing due to captive mines Operating profit stated Share of differential iron ore value as operating profit Net profit Ratio of differential value of iron ore as net profit Units Rs.6 2481. due to reasons mentioned above. market price of ore minus cost of iron ore incurred by SAIL) was a whopping 70 percent of its operating profit in the recent years (see Table 2 below). Crores 2126.4 1144.7 2009-10 1844.24 793.95 23.7 2011-12 2666./ tonne 862.e./ tonne 1466.3 4104.44 678.pdf (as viewed on November 5. Centre for Science and Environment.5 1531.2 Rs.36 23. this implies that SAIL’s profit over the recent years is increasingly because of the citizens’ gift of free iron ore and not because of its own internal value addition.65 603.38 25.6 2008-09 1791.

exhibits healthy Conversion EBITDA of USD 87-100/ tonne steel in the last two years (see graph 2). it receives. this concept of substitute value is called as ‘opportunity cost’. the opportunity cost for the government had it sold iron ore in the open market has increased from 19% of SAIL’s operating profit in 2006-07 to an astounding 70% in 2011-12. over and above any subsidies. 2012) 4 . Even the other public sector Vizag Steel.myiris. mining in a forest land vs revenue generated from the forest. 25 November 2010 http://www. 100 and not zero as per the traditional accounting sense. In finance too. The Conversion EBITDA of SAIL was just USD 21 (or Rs. For example: If a person has to chose between task A that earns him Rs. such as free raw materials. But they should be given due consideration in decision making. Graph 2: Conversion EBITDA unravels many hidden truths 300 250 200 151 150 100 50 0 2006-07 2007-08 2008-09 2009-10 2010-11 2011-2012 Source: CSE analysis.GREEN RATING PROJECT Opportunity costs not accounted In economics. 100 and another task B of free leisure activity. Note: Vizag Steel 2011-12 figure based on advanced estimates Conversion EBITDA USD/tonne steel 260 240 225 240 200 Vizag Steel SAIL 129 94 100 24 21 141 159 118 87 90 160 127 POSCO Korea 7 Source: Standard Chartered Equity Research. Opportunity costs are hidden monetary value and do not appear in the balance sheet of a company. which does not own any iron ore or coal mines. Opportunity costs are not the amount one actually transacts and hence are not costs in the traditional accounting sense. they are vital in managerial decision making. The term opportunity cost is normally used in natural resource economics to weigh financial option of say. then the opportunity cost of the leisure activity is Rs. the concept is called as earnings before interest tax depreciation and amortisation (EBITDA) due to conversion. in particular for resource planning and distribution. or simply ‘Conversion EBITDA’. Opportunity costs: This cost involves trade-offs between two options by weighing costs and benefits. This concept is normally used by financial analysts and investment banks such as Standard Chartered7 to measure whether a company is really adding value. So in this case. It is defined as value of a foregone activity when another alternative is chosen (see box below for details). 1050)/ tonne steel in 2011-12 as against USD 100-150/ tonne steel for international producers such as POSCO Korea who do not own captive iron ore and coal mines.pdf (as viewed on November 5.

pdf (as viewed on November 5. pleading “largely public interest” and claiming the entities are modeled on “sustainable and holistic development”. Among other criteria. it is found that the government through its citizens is increasingly grandfathering SAIL. an unfortunate situation in a liberalised economy.nic. wasteful expenditure. and allows greater financial and operational autonomy in decision making. AGNIMIRH BASU Iron ore mine in Orissa 8 Source: Department of Public Enterprises guidelines 19th May 2010 http://dpe. the citizens of the country are taking care of the company’s management and employees. the company should owe the Maharatna tag to its citizens and not because of the operational efficiency of its management. the union ministry of steel claims it wants reservation of iron ore mines for state owned entities.COMMENTARY Maharatna tag . So with SAIL’s profit being artificially inflated by free government (read citizens) subsidy of iron ore on one hand and by import parity pricing of its products on the other. a company should meet average annual net profit of over Rs 5000 crores during the last three years8 for being granted the tag. The tag granted by the Government of India through its Department of Public Enterprises (DPE) is for state owned entities with certain eligibility Overall. In fact. even the ‘Maharatna’ tag of SAIL needs to be questioned. with its current state of affairs and even with all these freebies. wastage of raw materials and resources and poor supervision (see box below). 2012) 5 . it may lose its Maharatna status if it continues to underperform in FY 2012-13 as the average net profit for three years is expected to slip below Rs.a misnomer Given these facts and accounting insights. Thus. This only leads to extravagance by the company management. it is able to meet the annual net profit criterion. frequent breakdown of equipments. 5000 crore (see Table 2 above). Meanwhile. All these eventually manifest in higher plant level resource use and pollution. If opportunity cost is taken into account. for the new proposed mining bill.

This will make all stakeholders aware of whether the subsidies are really being used for the welfare of the citizens.13 million tonnes (MT) of hot metal. 4. the management said. starting from this financial year (2012-13). The plant had in fiscal 2010-11 had posted a record production of 5.71 MT of hot metal. among many other reasons. 5. power (as viewed on November 5. management and employees. 2012) 2) SAIL crude steel production dips in 2011-12 CSE note: Even while the domestic steel market is growing.sail. Secondly.sarkaritel. SAIL’s crude steel production dipped 3.6% year over year (yoy) in 2011-12. Durgapur Steel Plant and Bokaro Steel plant and resultant Coke Oven gas shortage. “The health of some aging coke oven batteries posed a big challenge from early on in the year.90 MT of crude steel and 4. affecting coke production and gas availability for the reheating furnaces of the mills. affected production during the year adversely”. A major reason was the faltering coke oven batteries. all concerned public or private sector companies which receive subsidies from the nation. page 9: “Lower availability of Coke Ovens at Bhilai Steel Plant.GREEN RATING PROJECT EQUIPMENT HEALTH AFFECTS PRODUCTION 1) News: Production at SAIL’s Bhilai Steel Plant dips 2012) How could this be remedied? In the short term.57 MT of saleable steel. It’s time the government. or only for the welfare of handful of owners.29 MT of saleable steel in the just ended financial year. April The DPE also needs to overhaul its Maharatna eligibility criteria considering Conversion EBITDA. some 30 km west of Chhattisgarh capital Raipur. over a period of time. blaming the aging coke oven batteries for the fall. It is important to break them down to different business entities (like that in power sector where coal mining. Ignorant of these apparent fallacies.pdf (as viewed on November 5. 2012: Production at the public sector Bhilai Steel Plant dipped in the 2011-12 fiscal from the previous financial year. The flagship unit of Steel Authority of India Ltd (SAIL) located in Durg district. Source: http://www. produced 5.” it said in a statement. Source: http://www. as per CSE recommendation. transmission and distribution are separated) to bring in efficiencies of free market pricing. It was expected that the plant would further consolidate its production in year 2011-12 but the production dipped. planning commission and citizens wake-up to the other side of SAIL’s profits so as to bring about not only economic but also environmental benefits. 6 . Statement from the 2011-12 Annual Report of SAIL. non-renewable natural resources should never be awarded free to any public or private sector enterprise. the Indian government continued to freely handover SAIL the Rowghat mines in 2009.33 MT crude steel and 4. Profit margins are also falling. however. should report Conversion EBITDA along with past five year performance.

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